The International Monetary Fund (IMF) slashed its 2021 Philippine economic growth forecast to take into account the slow recovery and stricter quarantine measures imposed in the first half of the year.

During the Virtual 2021 Article IV Mission to the Philippines briefing on Wednesday, IMF Asia and Pacific Division Chief Thomas Helbling said the country's economy is now forecast to grow by 5.4 percent this year, significantly lower than the 6.9 percent earlier projection.

"The reason for this is we see a slowing in the recovery in the first half of 2021 before picking up in the second half of this year. Slowing recovery in the first half is mostly due to the second wave peak in April, which necessitated some stricter quarantine measures," said Helbling.

The IMF's latest forecast falls outside the government's downwardly adjusted 6.0 to 7.0 percent projection for this year.

Helbling said some of the strong rebound that the IMF expected from the previous forecast has been delayed.

He said, however, that the rebound is expected to strengthen in the second half of the year in 2022 with real gross domestic product (GDP) projected to grow by 7.0 percent, up from the earlier 6.5-percent forecast.

Drivers of growth include the easing of quarantine measures, progress in vaccinations, and macroeconomic policy support.

"Uncertainty around the pace of the economic recovery is high, and the balance of risks to economic activity is tilted toward the downside. Supply constraints could lead to delays in vaccinations, which in turn would increase the risk of virus resurgence after the recent second wave and tightening quarantine measures," said Helbling.

"Also, it could amplify the effect of external shocks, such as rising global interest rates and inflation, that would constrain the monetary policy response and raise financing costs for the public and private sector. On the other hand, a reinvigorated infrastructure push with greater private sector participation and a stronger global recovery could help accelerate growth," he added.

The IMF official pointed out that monetary policy should remain accommodative in order for the recovery to take hold.

"While the recent spikes in inflation should be closely monitored, the present monetary policy setting is appropriate as the current inflation pressure appears to be temporary and is likely to taper off in the second half of the year," he said.

According to him, inflation is forecast to average 4.2 percent this year before settling at 3.0 percent in 2022.

Helbling, meanwhile, also cited the importance of the timely implementation of fiscal support-with flexibility to address evolving priorities.

"The fiscal deficit targeted in the 2021 budget provides significant stimulus to economic activity, but given the imperative to beat the virus and the continued difficulties faced by vulnerable families and businesses, more resources could be needed. Such resources should aim to bolster the healthcare system to accelerate vaccinations, strengthen capacity for testing, tracing, isolation, and treatment, and support affected families and businesses. A mediumterm fiscal strategy should underpin the eventual rebuilding of fiscal space," he said.

Fiscal stability and credit growth

Aside from these, he also cited the need to maintain financial stability and revive credit growth.

Liquidity and capital in the banking system have remained strong, as banks have benefitted from past reforms and policy support at the onset of the pandemic. However, the full impact of the pandemic is yet to manifest itself, and continued vigilance is needed to safeguard financial stability. To this end, an expansion of the macroprudential toolkit would help enhance the resilience of the financial system.

He said the accelerated implementation of Financial Institutions Strategic Transfer or FIST Act, passage of the Government Financial Institutions Unified Initiatives to Distressed Enterprises for Economic Recovery or Guide bill, and strengthening of the anti-money laundering will also aid the economic recovery.

"To rekindle investment and revert to its strong prepandemic growth rates, the Philippines needs to maintain the momentum of structural reforms. Important progress has been made on many fronts, such as tax reform, digital payments, cutting red tape, and climate mitigation and adaptation," said Helbling.

"However, sustained efforts will be needed to reduce restrictions on foreign investment, fasttrack the rollout of the national ID (identification), scale up social protection, strengthen healthcare and education, and implement climate change commitments. These reforms will help the Philippines build back better and position the country for a more equitable and greener future," he added.